John
Helmer John Helmer is the longest continuously serving
foreign correspondent in Russia, and the only western
journalist to direct his own bureau independent of single
national or commercial ties. Helmer is one of the most
widely read Russian specialists in the business world for
his news-breaking stories on Russian diamonds, mining,
shipping, insurance, food trade, and business policy.

This is the question which shareholders of two Canadian-listed
junior goldmining companies have been asking since the two
companies, both apparently controlled by Russian mining
entrepreneur Maxim Finsky (image), proposed an all-share merger
on the basis of valuation of assets buried in the wilds of
eastern Siberia.

On March 14, here is what White Tiger Gold (WTG:CN)) and Century
Mining (CMM:CN), both Toronto Stock Exchange listed, said they
have agreed to do: “Under the terms of the Business Combination,
shareholders of Century will receive 0.40 of a White Tiger common
share for each common share of Century held. The board of
directors of each company has unanimously approved the Business
Combination.” A break-fee penalty of C$13.5 million was accepted
by Century if its board opts for a better deal; or if Deutsche
Bank London refuses to accept the deal. Deutsche Bank is the
principal financier of Century’s operations through a US$33
million advance to buy Century’s future gold production.

Press reports of the merger deal claimed its combined value was
C$743 million, based on the share trading for the two stocks. At
the time of the announcement, WTG’s 114 million shares had a
total market capitalization of $371 million. The week before the
deal announcement, WTG was at $485 million, before selling ahead
of the merger cut $114 million off its value.

WTG’s THREE-MONTH SHARE PRICE TRAJECTORY

Century Mining has 408 million shares on issue; on March 14, the
WTG offer fixed its value at C$273 million. Just a few days
earlier, its share price was much higher, and its market cap $306
million. The combination took $33 million off CMM’s value, adding
up to a combined loss of market value of $147 million.

CMM’S THREE-MONTH SHARE PRICE TRAJECTORY

The market apparently doubted that WTG was the bigger of the two
miners, so the collapse of both share prices ended up bringing
the two closer together. Still, WTG remained with the higher
value. Asked who provided the expertise to calculate this during
the merger negotiations, Cowley of WTG said “[the valuation
ratio] was agreed by independent committees of both companies.
[They] are a group of people not in the public domain.” He added
that the committees were advised by Moelis & Company of New
York and Blair Franklin of Toronto. Moelis reports that last year
it won The Banker Magazine’s award for “most innovative
boutique”. Blair Franklin reports its motto as “At all times our
primary interest is: What is in our client’s best interest?”

At Blair Franklin, Ben Mandell has been identified as the advisor
to Century Mining for the merger deal. He has yet to respond to
the question of how he calculated the valuation ratio for the
share swap.

The facts on the ground look a little different from the
announced valuations According to the only documented valuation
WTG has so far presented publicly, a technical report by the
Micon consultancy known in Canadian parlance as NI43-101, WTG’s
only operational mine, Savkino in the Trans-Baikal region,
started this year with 125,471 oz of gold reserves. By the year
2017, when mine life will be over, Micon reports it will be
capable of producing a cumulative total 103,266 oz, at an average
cash cost of $678 per oz, generate free cashflow of $9.1 million.
Net income over the entire project, according to Micon, would be
just $6.9 million.

Micon’s calculations are based on projective modelling of data
from this survey map of the Savkino deposit:

The Micon analysis, dated November 22 and posted on the Canadian
market repository website SEDAR on December 29, says this mine
produced 7,507 oz in 2009; 24,434 oz in 2010. It is possible
Micon’s estimate for production in 2010 was not realized, because
WTG chief executive Geoffrey Cowley said this week he estimates
his company’s production last year at “between 13,000 and 14,000
ounces.” This, he confirmed, was entirely from the Savkino mine.

In the same period, Century has reported producing 19,224 ozs at
its San Juan, Peru, goldmine, and 14,419 ozs at its Lamaque,
Quebec, making a total of 33,643 ozs, or at least 38% more than
WTG; possibly two and a half times more. In 2012, Century claims
to be targeting annual gold production of 130,000 oz for Lamaque
and San Juan combined. By contrast, WTG’s best hope, according to
Micon’s analysis, is for output of 22,184 oz, one-sixth the
volume of Century.

In their reserves count, Century’s Lamaque claims proven and
probable reserves of 1.14 million oz, grading at 4.56 grams per
tonne, with a mine life of at least 11 years. Century’s San Juan
mine claims 186,316 proven and probable reserves, grading 8.87
g/t, with a mine life of 7 years. Savkino can do no better than a
reserves count at present of 125,471 oz, grading 1.29 g/t, and a
mine life of 7 years. On these indicators, WTG is about ten times
smaller than Century.

The financial reports of Century, issued quarterly, indicate that
in the nine months to September 30 last, gold sale revenues came
to $16.2 million; costs of production were $10.8 million, and
there was an operating profit of $5.4 million, before the
bottom-line, after depreciation, tax, and other charges, turned
into a net loss of $4 million.

WTG hasn’t issued financial reports yet, because the company did
not come into existence in its present form until last December.
More of how that happened shortly. The first financial report
from WTG has been promised by CEO Cowley for this week. All that
has appeared so far are notices indicating that earlier in March,
WTG changed its auditor and appointed KPMG.

WTG’s predecessor company, SL Resources, also listed in Toronto,
reported that as of September 30 last, it held cash of $27,370
and had liabilities of $49,032. Financially, it was dwarfed by
Century Mining, and was not a mine-operating company at all.

WTG reversed into SL Resources in December within days of a
Russian company called LLC UK Dalsvetmet (DZM — never mind the
name, it is registered in Russia) agreeing to move SL Resources
from Canadian registration to the British Virgin Islands,
changing its name to WTG, and merging by reverse takeover with
Dalsvetmet. On December 16, from an office in Tortola, WTG
announced it had obtained conditional approval to sell shares in
Toronto. From the negligible assets which SL Resources held, WTG
now claimed the underlying value of “four wholly-owned
subsidiaries of DZM and DZM’s entire 80% interest in a fifth
subsidiary.”

These subsidiaries are licence holders for the Savkino mine and
gold prospecting licences elsewhere in the Russian Fareast. A
search of the Russian press and internet archives for these
subsidiaries and their licence areas indicates rich promises,
poor results. In 2008, at the time the first gold was poured at
Savkino, the company claimed it would be producing 850 kgs
(27,328 oz) of gold in 2009. The actual result, according to
Micon, was less than half. The company also claimed reserves
amounting to 190,000 oz. When Micon reviewed the data, it could
not find one in five of those ounces.

In October of 2009, Dalsvetmet said it would produce almost
13,000 oz that year; according to Micon, it fell short and
produced just 12,255 oz. In 2010, the company forecast production
of more than 32,000 oz – the actual outcome was less than half as
much. The gold reserve claim, counting Savkino and other
exploration prospects, added up to 870,000 oz, according to the
published claims.

In November of 2009, Finsky identified himself as the owner of
Dalsvetmet and told Vedomosti, a Moscow business newspaper, that
he intended to sell shares of his company in a Hong Kong or
Shanghai Stock Exchange listing. He said “offers from Chinese
investors to purchase shares are received continuously”,
totaling, he claimed, $150 million. He also claimed that his
partners were two Canadians, Fran Scola and Margaret Kent. Scola
appears as a member of the Century Mining board which voted for
the WTG merger. Kent was chief executive of Century Mining until
she was replaced in July of 2010 by Daniel Major.

Richard Meschke, vice president for legal and corporate
development at Century, said today that Finsky is the controlling
shareholder of the company with a stake of about 30%, which he
started accumulating in 2009. Finsky himself claimed in his
November 2009 newspaper interview that he owned 40% of the
company, with Scola and Kent owning the rest. The China stock
sale never materialized.

Instead of raising the interest of Chinese investors, Finsky has
raised the ire of minority shareholders of Century Mining. They
charge that he used his power at Century to encourage the market
to cut the share price ahead of the mid-March merger deal, and
thereby favour WTG in the share swap, while retaining control of
the expanded company. Cowley was asked to comment. “I am not
prepared to respond to criticism by Century Mining shareholders.
They will have their shareholders’meeting on May 12. Presumably,
they will have an opportunity to discuss [these questions].”

But what is WTG worth? In Russian practice, mining companies are
obliged to submit their reserves and resources counts to the
State Reserves Committee and Rosnedra, the state mine licensing
agency. Cowley was asked whether WTG had done this, and if so,
what are the officially authorized reserve counts for Savkino and
the prospecting areas, if any. Cowley said he wasn’t sure. “I
have to check. I’m sure we do.” Asked what the proven and
probable reserves are for Savkino, he said: “I don’t have [them]
in front of me.” He claimed the full data were issued in the
Micon report of December 29 posted on SEDAR. The report dopes not
refer to official Russian state reserve estimates.

The State Reserves Committee declines to answer press questions.
Rosnedra was asked to say whether Savkino had applied for and
been granted an official reserve figure. The agency did not
reply.

Cowley explained that when WTG’s shares were offered for sale in
their debut listing on December 31 on the Toronto exchange, “a
very small amount of retail shares” were sold. There was no
prospectus for the sale, he added, “because it was a private
placement”. What he means is that between converting SL Resources
and Dalsvetmet into WTG, and the share sale of December 31,
Finsky arranged for WTG to sell 24.8 million shares for a total
of $24.8 million to what a company release called “various
international investors”.

Wth this sale of 22% of the total issue, a share price was fixed
of $1. Since the company has reported that Finsky owned 85
million of the shares (74%), that appears to have left just 4
million for sale on the stock exchange – just 4%. Who ran up the
share price to buy these shares, Cowley was asked . He said he
doesn’t know; the company has announced it knows of no material
circumstances warranting the share price movement. Cowley
acknowledged only that Finsky is the controlling shareholder, and
that the investors in the private placement “are locked in until
April 30.”

Finsky has a controversial reputation in the Russian mining
industry. Reportedly a friend since childhood of Mikhail
Prokhorov, he worked for him at Norilsk Nickel and was employed
to buy gold assets which were later spun off into a separate
mining concern, Polyus Gold. An executive at another Russian
mining group says Finsky over-paid for the assets; in at least
one case, Lenzoloto, more than $100 million of initial outlay was
written off the Polyus Gold books a year after the
acquisition.

During Prokhorov’s fight to oust former partner Vladimir Potanin
from Polyus Gold in 2008, Finsky headed a further spinoff company
called Intergeo. Potanin’s group charged this was improperly
spiriting assets out of Polyus Gold.

From an initial price of US$26 cents per share at the merger of
Dalsvetmet with SL Resources on November 11, just before the
combination took the name of WTG, Finsky saw the price jump to $1
in the private placement of mid-December, and then to $6.67 in
the first week of January, 2011. Cowley admitted that very few
shares were actually traded. “We had no control and we had no
significant idea of why the price shot up.” One analyst has
reported that “given that Mr. Finsky owns on the order of 74% of
White Tiger Gold shares, I would argue that a fair market price
for White Tiger Gold does not exist.”

Finsky, who maintains a Moscow office as chief executive of
Intergeo and a seat on the Polyus Gold board of directors, did
not respond to a request for his comment.

Read the original article on Dances With Bears. John Helmer is the longest continuously serving foreign correspondent in Russia, and the only western journalist to direct his own bureau independent of single national or commercial ties. Copyright 2011.